What is plumbline and how should I use it?

A plumb line is used to fix the vertical and therefore the horizontal. This list hopes to help new investors do the same. Pic credit: Mr. atm

1: PlumbLine is a boring list of mutual funds. It will NOT change from month to month unless there is a significant change in the fund’s strategy (as in the present) or dip in performance or some other special situation. So please do not look forward to it. Also, there are plenty of good mutual funds that are not part of PlumbLine. If your funds are different, you are probably better off. Do not worry about it.

2: Do not use PlumbLine for confirmation of your choices! PlumbLine is meant for young earners and first-time investors after they have used the robo advisory template.

3: If tomorrow the funds in the list change, you will have to take a call on what you need to do, based on the fund performance from the date in which you invested. I cannot help you here, other than talk about how to review.

4: This is a personalized list and will be subject to my biases. I invest with a bias to get things done and analyze without bias to present facts. So please bear that in mind. Don’t waste your time and mine asking “why are biased towards Quantum and Franklin?”, “Why is X or Y fund not here?”, “Z is a better choice”. This list is meant for new mutual fund investors to get going.

Disclaimer

On its own, this list has no meaning and unless you are able to look at it in the right perspective and context, it will not help you. The hope is that the robo template will try and provide such perspective which still has to be processed and interpreted by you.

Finally, I am only human and more than capable of making mistakes. Also, I am a below average investor and fund picker or analyzer. I am not a fan of looking into the fund portfolio. I prefer funds with a narrow investment mandate. I am sure you will agree that most of the picks are lame and obvious.and that this list is a no-brainer and nothing special.

If the funds here stop performing in future or have credit defaults issues, all I can do is to modify the list (if required). I WILL NOT BE IN ANY WAY RESPONSIBLE FOR YOUR INVESTMENT CHOICES, CAPITAL GAINS OR LOSSES.

If a PlumbLIne fund is present in your portfolio, it means nothing.

If none of your funds is present in the PlumbLine list, it means nothing.

MUTUAL FUNDS ARE SUBJECT TO IGNORANCE RISKS AND MARKET RISKS. PLEASE READ AND UNDERSTAND ALL SCHEME RELATED DOCUMENTS BEFORE INVESTING.

FAQ on Plumbline

1. Why are X, Y or Z funds not part of plumbline —> Plumbline is my list. Don’t expect me to make a list that matches your expectations.

2. The funds you have listed are not even 4-star funds —> I don’t care. Star ratings are injurious to your mental and fiscal health. Comparisons are injurious to peace of mind and plumbline is just plain bad.

3 Plumbline does not feature the top funds from your monthly screener —> Yeah because I did not consult it. Plumbline is a qualitative assessment of a funds investment strategy, mandate and performance. Also since most funds have changed nature, the monthly screener is of no value anymore. If star rating portals had any responsibility, they will admit to the same.

I am an investor in the fund, what should I do? Nothing! It is now an ultra short-term fund. Its credit risk profile has increased perhaps a little bit more interest rate risk. Don’t lose sleep about it. Continue to hold after reading the new investment strategy and if you are comfortable with it.

Plumbline May 2018

I provide the reasoning behind each choice below:

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Liquid Fund: Quantum Liquid fund is still the same as before, so no change.

Equity arbitrage: UTI Spread or ICICI Equity arbitrage, same as before, no change. In fact, although ICICI has not mentioned anything about its arbitrage fund, the product presentation given to distributors mentions that it will now have no direct equity (earlier it was 5%).

Debt Ultra Short Term (low risk): This is a new category but with the same fund in a new avatar(!). Franklin India Savings Fund-Direct Plan Growth (previously Savings plus fund) will not hold any short-term floating rate bonds to reduce interest rate risk anymore. Franklin has a new floating rate fund, but I suspect it will not have short-term bonds so that has not been considered.

Debt: Ultra short-term (moderate risk): New category with a new fund (in the same avatar!). Franklin India Ultra-Short Bond Fund-Direct Plan. . This will take on credit risk so not for everyone.

Debt: Medium duration (medium risk): I have removed the Dynamic bond fund category because I am worried about how dynamic Quantum Dynamic would be. So even though the fund is good and existing investors can continue (aware of risks), I will no longer include dynamic bond funds in plumbline.

So instead, I have now included a diversified medium duration fund – Franklin India Income Opportunities Fund – this will take on credit risk and interest rate risk, but has an option to lower bond tenure according to rate movements.. This can be good medium risk option for long-term goals.

Debt: Corporate Bond (medium risk) For investors who wish to invest in quality corporate bonds for the long term (interest risk will be present), Franklin India Corporate Debt Fund Direct Plan Growth option formerly Franklin India Income Builder Account is an option. But this will have a higher risk than above category as it will only invest in one type of bonds. This is a new category and new fund.

I have a strong Franklin bias when it comes to debt funds for two reasons: they always make the product positioning clear to investors (who bother to read) – this is crucial. Interest rate risk is beyond their control as it is governed by market forces. They do take on quite a bit of credit risk and this does go bad often (we don’t always hear about it!), but if the bonds become junk, the AMC is wealthy enough to bail out the fund. I repeat that there is no point in questioning me about his bias. Unless we have biases, we will never get things done as an investor.

ELSS: No change. Franklin Taxshield.

Equity multi-cap: No change. QLTE. Canara Robeco Emerging Equity can be a candidate here now that is has become a large and mid-cap fund from a mid-cap fund.

Index funds: No change.

Equity mid-cap: Franklin Prima retained and I am excited that it now has Nifty Midcap 150 as a benchmark. As we saw a few days ago this is better than the NIfty Next 50. Canara Robeco Emerging Equity removed for the above reason. HDFC Midcap Opp fund has also been retained (can’t find its new benchmark though!)

Equity small cap: I try to neither make nor encourage immature choices.

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About the Author

M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association.For speaking engagements write to pattu [at] freefincal [dot] com

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14 Comments

Can you define medium duration in debt fund? This is how I feel: Liquid : 0 to 90 days Ultra short term: Less than 1 year Short term – 1 to 3 years. By medium term, I am assuming the modified duration is 3 to 5 years.

Equity small cap : I try to neither make nor encourage immature choices.

About above, IMO, I feel that everyone has an risk appetite, I have a high risk apetite and I want to make or lose 20% pa, If a fund has invested in really good small cap funds which has given consistent performance over 3+ years of time, why not invest in that ? I see you have always discouraged it sir. Can you provide more insights please ?

Pattu , For any one still interested in investing ST GILT due to zero credit risk and with DSP Blackrock ST GILT changing its mandate would investing in SBI ST GILT or UTI ST GILT can be a good option granted its duration is between 2-3 years and not 1 years as was the case with DSP. Thank You

Are money market instruments less prone to credit risk than other debt securities? Is this why the Franklin savings fund is classified different to Franklin ultra short term? Also is there any mandate for these funds regarding the quality(credit rating) of the investments they are making. I checked the document which came detailing the changes in the fund, but didnt see this. Or is this something we will have to see every month based on the published portfolio

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